A lesson in newspeak: outsourcing, insourcing, offshoring

(June 7, 2004) — Ahh, let's all pause a moment and remember the good old days. The days when “outsourcing” wasn't a swear word, when its very utterance didn't spark a political debate that led to questions about one's patriotism, sanity or fitness to be president.

I also can remember when being global had a positive connotation, meaning that your company could compete at the highest level. Now, in some camps at least, globalization is as popular a concept as beating your grandmother.

Plastics News, after all, isn't that old — just 15 years — but I can recall when outsourcing used to be regarded as good news for North American plastics processors. After all, if a captive processor — i.e. an original equipment manufacturer such as a General Motors Corp. or AT&T — wasn't going to produce in-house the plastic components it needed, then most likely it was going to contract with a local (or at least domestic) shop to do that work for it.

But, my, how the pendulum swings.

Now one needs to append the adjective “domestic” to the term to convey the original meaning of domestic outsourcing (this, I'm told, makes it a retronym) from that nasty new variation called simply “outsourcing,” or the relatively new “offshoring” synonym favored by some.

And then, of course, there now is more attention also being paid to “insourcing” — the act of creating or supporting American jobs by the U.S. operations of companies that are headquartered abroad. This group even has its own Washington-based trade association, the Organization for International Investment, which claims 115 corporate members including such well-known firms as BASF Corp., Bayer Corp., DaimlerChrysler, Honda North America Inc., Nokia Inc., Rexam Inc., Saint-Gobain Corp., Siemens Corp., Sony Corp. of America and Tyco International (US) Inc.

OFII spouts numerous facts about insourcing to support its cause, including:

* Such U.S. subsidiaries employ a record-high 6.4 million Americans.

* New foreign direct investment in the United States more than doubled in 2003, to $82 billion, according to recent Department of Commerce figures.

* 34 percent of the jobs at U.S. subsidiaries are in manufacturing — more than double the proportion of manufacturing at all U.S. companies.

* During the past 15 years, manufacturing insourced jobs grew by 82 percent — at an annual rate of 5.5 percent — while manufacturing outsourced jobs grew by 23 percent, or at a 1.5 percent annual rate.

* The most successful states in attracting insourced jobs are California (713,500 jobs), New York (480,800) and Texas (428,100), followed by Illinois, Florida, New Jersey, Pennsylvania, Michigan, Georgia and Ohio.

Of course, the OFII and insourcing have their critics.

Some politicians point out that foreign companies in some cases have acquired U.S. companies, cut their workforces and then still have gotten credit for those remaining jobs that they have “added” to their employment rolls.

Such arguments underscore the extremely foggy nature of this whole debate about outsourcing, insourcing and all their synonyms.

Fourteen months ago the Wall Street Journal even did a lead, front-page story titled “Behind Outsourcing Debate: Surprisingly Few Hard Numbers.” It went on to document how even some of the most widely quoted numbers — from some economists and firms such as Forrester Research Inc. and International Data Corp. — have been misused, misinterpreted or drawn from apparently flawed research.

In today's climate, people sometimes tend to attribute the loss of jobs to outsourcing abroad when, in fact, the work simply went to the same firm's other plants (occasionally within the United States), as consolidation realigned the company's work flow. Similarly, a corporation may indeed outsource jobs abroad, but create an equal or greater number of jobs at its other U.S. plants — perhaps to serve new or different customers — but the job losses garner more attention than the insourced jobs.

“The great unknown,” wrote WSJ reporter Jon E. Hilsenrath, “is how much outsourcing will accelerate in the years ahead. While uncertain about absolute numbers, many economists agree that it probably will pick up.”

Still, it is a trend to be embraced, according to some. Researchers at San Francisco think-tank McKinsey Global Institute declare that “offshoring benefits the American economy far more than previously thought.” Earlier this year, a McKinsey study found that “the United States receives 78 percent of the new economic value created by offshoring, vs. the 22 percent that goes to the lower-wage countries where these services are relocated.”

Using India as an example, it estimated that while India gains a net benefit of at least 33 cents from every dollar spent on a business process the United States sends offshore, America earns a benefit of at least $1.13 for each such dollar spent.

McKinsey attributes this disparity to the fact that “offshoring creates value for individual American companies and frees U.S. resources for activities with more value added.”

For example, McKinsey claims, companies pass cost savings on to consumers through lower prices and to investors through higher profits. It says companies also get new sales from Indian firms that boost imports from the United States. Meanwhile, the U.S. economy redeploys workers who lose their jobs from offshoring in ways that boost growth as well.

Well, tell that to the U.S. worker who lost her job to outsourcing and has been looking for new work fruitlessly for months.

Still, McKinsey insists that “focusing on job losses misses the bigger picture. The losses are part of an ongoing economic restructuring with which the U.S. economy is well-acquainted. Technological change, economic recessions, shifts in consumer demand, business restructuring and public policy can and frequently do result in job losses.”

Nobody disputes that these global gyrations and dislocations cause pain to some Americans and their families. But soaring U.S. productivity and the lengthy economic downturn undoubtedly have exacerbated these symptoms.

Meanwhile, the current presidential campaign has ratcheted up the fiery rhetoric — too often to the exclusion of fiscal truths that might get in the way of a good stump speech. (Witness the public pillorying of Bush chief economic adviser Gregory Mankiw, who had the temerity to suggest that outsourcing might possibly, in the long run, actually benefit the U.S. economy.)

Yet, there are measures companies can take to ease these pains. They could take a percentage of the savings they realize from offshoring and apply them to better training programs, generous severance packages and enabling the portability of health-care insurance for displaced workers.

And politicians could better spend their time and energy working to find ways to facilitate such actions, rather than pronouncing futile plans to build walls around this country to try to stem the inexorable tide of globalization — at least until they get (re)elected.

As long as questions remain about the strength of the U.S. economic rebound, companies can be expected increasingly to use temporary labor and to apply ever-improving automation to keep employee headcounts down, and hence avoid paying the soaring social costs associated with each full-time worker.

The good news is that the same hard work and American corporate ingenuity that is spurring roughly 5 percent annual productivity gains by U.S. companies also will serve to address the issues caused by outsourcing and globalization. Eventually, the “next big thing” will emerge — be it nanotechnology, biotechnology, space commercialization, energy, etc. — and reignite a U.S. hiring boom.

In the meantime, I prefer not to wallow too deeply in the philosophical aspects of these contentious issues. Rather, I'd like to defer to that noted intellectual Dave Barry. In his own inimitable way, the syndicated Miami Herald humorist tackled the subject of outsourcing in his May 7 column, when he wrote the following:

“You youngsters won't believe this, but there was a time when Americans actually made physical things called 'products' right here in America. … After we stopped making things,” Barry wrote, “America became a 'service economy,' which is a business term meaning 'an economy where it is virtually impossible to get service.' But now even our service industries are being outsourced. Take, for example, 'Technical Support,' which is the department you call when you are having a technical problem and need to be placed on hold. …

“The point is,” he noted, “that everything is being outsourced. In a few years, the only industry left in the United States will be 'reality' television. A lot of people think this is bad. Congress recently tried to pass a law against outsourcing, only to discover that all federal legislation since 1997 actually has been produced in Taiwan. … So outsourcing is here to stay,” concluded Barry, who then announced that henceforth somebody else would write his weekly column overseas.

Robert Grace has been editor of Plastics News since its founding in the pre-outsourcing-hysteria days.

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